10 Easy steps of Equity Release

Equity Release

POOR advice and pushy sales tactics are snaring many older homeowners into equity release schemes that are not appropriate for them, Age Concern said this week. Before you succumb to the glossy brochures that promise a comfortable retirement, here are ten things you should know.

1 What is equity release?
There are two main types of plan: lifetime mortgages and home reversion. Most people choose a lifetime mortgage, which is a loan against the value of your home. Repayments can roll up and need not be paid until the property is sold. Reversion schemes entail selling all or part of your home to an equity release company and living in it rent-free until you die or perhaps move into long-term care. Your home is then sold by the company and its percentage of ownership is taken from the sale proceeds.

2 Age qualification
For some schemes the minimum age is 55; for others it is 70. You must own your home and have little or no mortgage debt. The property must be in a good state of repair and be worth at least £50,000.

3 It will cost you
Key Retirement Solutions, the specialist adviser, gives the example of a couple, both aged 70, who want to raise £50,000 against their £200,000 home. They want to pay back their debt after 15 years, by which time, if property prices rose by 3 per cent a year, their home would be worth £311,600. If they took out a lifetime mortgage at 6.6 per cent, they would ultimately owe £130,415.

To raise £50,000 through home reversion they would have to sell 62 per cent of their home, which would give the equity release company £193,190 from the later sale.

4 Consider the alternatives
Dean Mirfin, of Key Retirement Solutions, says that you could take out a standard interest-only mortgage, move to a smaller house or let your children help you in return for an eventual inheritance. Equity release can jeopardise entitlement to state benefits.

5 No cash for your kids
Depleting your estate can be useful for inheritance tax planning. But are your children banking on a large inheritance? Discuss your plans with your family first.

6 Watching over you
The Financial Services Authority (FSA) regulates lifetime mortgages but does not yet regulate home reversion plans.

7 Avoid the dangers
Safe Home Income Plans (Ship) is a voluntary industry code that provides consumers with certain guarantees. Ship members spell out benefits, obligations and limitations. Their plans also protect against customers ever owing more than the value of their home.

8 The right advice
You may need tax advice as well as financial advice, which can cost about 1.5 per cent of your lump sum. Legal advice can cost up to £500.

9 Take your time
The FSA says that more than 70 per cent of advisers do not gather enough information from clients. Mr Mirfin says: “The first meeting should last more than one hour. A second meeting allows clients to reconsider decisions. Be wary of an adviser who makes a snap recommendation.” Age Concern says that typical poor advice is to take an equity release mortgage at a charge of about 7 per cent and then put the lump sum into a savings account that pays only 4 per cent.

10 Further information
Read the FSA’s consumer factsheet at www.fsa.gov.uk or call 0845 6061234. Ship’s website is www.ship-ltd.org or call 0870 2416060. Contact Help the Aged at www.helptheaged.org.uk or call 0808 8006565. Call Age Concern’s consumer helpline on 0800 009966 for a copy of its guide.

information courtesy of Times Online

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